Ratings: An Essential Tool For Building Long-Term Trust
by Martin Weiss, Ph.D. and Melissa Gannon

Many Americans wouldn't buy a car or even go to a movie without first consulting a rating guide to see what some independent opinion has to say. But when it comes to insurance, few seem to take ratings very seriously; and fewer still understand the key differences among the major rating agencies.

Today, there are five major rating agencies: A.M. Best, Duff & Phelps, Moody's, Standard & Poor's and Weiss Ratings. This plethora of opinions has made the impact of a downgrade by one company less severe while giving consumers access to a far greater diversity of information. But five different voices can also be much more confusing.

For starters, the rating scales vary all over the lot, as you can see from this comparison provided by the U.S. General Accounting Office (GAO):

GAO's Comparison of Insurance Company Rating Agency Scales Rating Weiss Best * S&P Moodys D&P Secure A+,A,A- A++,A+ AAA Aaa AAA   B+,B,B- A,A- AA+,AA,AA- Aa1,Aa2,Aa3 AA+,AA,AA-   C+,C,C- B++,B+ A+,A,A- A1,A2,A3 A+,A,A-     B,B- BBB+,BBB,BBB- Baa1,Baa2,Baa3 BBB+,BBB,BBB Vulnerable D+,D,D- C++,C+ BB+,BB,BB- Ba1,Ba2,Ba3 BB+,BB,BB-     C,C- B+,B,B- B1,B2,B3 B+,B,B-   E+,E,E- D CCC,(CC,C) Caa,Ca,C CCC+,CCC,CCC-   F E,F (D),R   DD

Some obvious contrasts in the scales used by the five agencies:

* At A.M. Best, a "B" is clearly a bad rating, denoting a fourth tier company that is well within the range that the GAO has defined as "vulnerable." At Weiss, a "B" is clearly a good rating, denoting a second tier company, in the GAO's "secure" range.

* A.M. Best's and Weiss' scales range from A to F. But the scales at the other three agencies range primarily from A to C or equivalent. As a result, an A+ at Best or Weiss is at or near the top of the scale. But the apparently "same" A+ at other agencies denotes a third-tier company, according to the GAO. This is a large and potentially confusing difference that most consumers are unaware of.

Voluntary vs. Involuntary Ratings

Despite the differences in rating scales, all of the rating agencies look at essentially the same criteria to evaluate insurers: capitalization, profitability, and asset quality. There are several key differences in the rating process itself however, that are not widely known.

Voluntary ratings: All of the rating agencies except for Weiss employ a voluntary rating system wherein an insurance company requests to be rated and pays a fee for the service. In exchange for this fee, the management of the insurer is given an opportunity to present a favorable picture of the company's future. Once the evaluation is completed, most of the rating agencies will allow the company to preview its rating with the option to withhold publication if it considers the rating unfavorable. This rating system is the most common and has long been considered the standard.

Involuntary ratings: In this system, the rating agency takes the initiative and rates the insurer regardless of whether or not it wants to be rated. Weiss was the pioneer in this area, introducing its involuntary ratings in 1989, and is the only rating agency that adheres strictly to the involuntary rating system. One other agency does publish involuntary ratings for most life insurers but also encourages the insurer to purchase a voluntary rating, in which case the involuntary rating is withdrawn.

This adds to the confusion for the consumer -- and even for the insurance professional. We end up with some rating agencies that may be more liberal in dispensing their top ratings in order to attract new clients, while other rating systems may be considered tougher.

How Should Agents Present Insurance Company Ratings To Consumers?

Unfortunately, many insurance agents tend to gloss over the financial stability aspect when working with their clients. They tend to quote whatever rating makes the company look the best, without full disclosure regarding the actual meaning of a rating and how it compares to other ratings the company has received. While this approach may very well help close a sale, it may be misleading and do a great disservice to both the client and the agent.

Since insurance sales is largely a relationship business, it is extremely important for the agent to cultivate a feeling of trust with his/her client. And there's no greater way to lose that trust than by misleading a client about the financial stability of an insurer. In contrast, a sales approach involving full disclosure can go a long way toward building trust, even if the disclosure is not completely positive. The client develops the view that you have their best interests at heart -- that you are acting as their agent, not as an agent of the company.

Consumers have easy access to most ratings through public libraries and the Internet. But they still need your help to clear up the confusion that naturally ensues. That's where you can play a positive role, building the trust that is the foundation of any truly successful business. We recommend that agents:

1. Discuss risk with clients. The statistics prove that, regardless of which rating system you use, a poorly rated company has a higher chance of failure. And even if the company does not fail, its service and claims paying ability are bound to decline if its finances deteriorate. Therefore, full disclosure of these potential risks is the only way to go if you plan to be in business for the long haul.
2. Show the consumer the GAO's table we have provided in this article. That immediately puts any rating in the proper perspective.
3. Quote at least two ratings, preferable at least one of the ratings quoted is based on an involuntary rating system.

With these three simple steps, you should still be able to quote a favorable rating for most companies, while also providing the full disclosure that helps build long-term relationships.